College of Business and Law and RMIT Online

College of Business and Law and RMIT Online

BUSM2567 Business Decision Making

Assessment 1: Case sStudy bBrief

Background

P&M Ltd is a company that manufactures domestic kitchen and laundry appliances. Their factories are in Melbourne, but they sell their products all over Australia. The company has 2600 employees.

Your task

The operations manager of the dishwasher Division, Yichen, has asked you to use CVP analysis to inform decisions about production schedules, pricing, and product design. As sales have declined over the last five years, Yichen worries that corporate managers may divert capital from the Division to other, more profitable investments.

Large offer from a new customer

In January 2022, a large Indonesian retailer approached the sales manager to buy 20,000 dishwashers at AUD 450 per unit, delivered before 20 May 2022. The buyer is willing to take possession of the goods at the factory and accept responsibility for all subsequent logistics. The offer expires in 7 days.

The management team needs to decide whether to accept this offer. The sales manager is reluctant to accept the low price, but Yichen does not like to see the factory working at a fraction of its capacity.

They consult sales and marketing. They expect demand in the Australian market for the year ended 30 June 2022 to be the same or lower than the previous year. Yichen also confirms that the Division has the capacity to manufacture the 20,000 dishwashers by the required date while still meeting the demands of all existing customers.

Product design changes

The Divisions Chief engineer has recently identified the root cause of a large portion of after-sale faults in P&Ms dishwashers: water pumps and associated controls. The team has come up with a new design that integrates all the pumps and the corresponding control valves in a single more robust and modular sub-assembly.

Field testing shows that the new design is highly reliable and performs better than the older model. It is aesthetically appealing and is expected to halve the cost of after-service and warranties. However, the sub-assembly is manufactured using state-of-the-art equipment, which increases manufacturing overheads by about $3 million per year - mainly depreciation and maintenance. This would be partially off-set by lower labour and material costs. Additionally, production lines would need to be reconfigured and workers trained.

The Chief Engineer estimates that it will take about 18 months to specify, purchase and commission the equipment and to provide training. The marketing team believes that the new design will strengthen P&Ms brand and boost demand, but doesnt expect significant sales increases for at least a year after the new product is launched.

Yichens approval is required before P&Ms investment committee will consider granting the required capital for this new design.

Findings about cost structure and capacity of the dishwasher division

In Week 1 of the course you learned about CVP analysis, including the differences between variable and fixed costs. When you work with Yichen on the Divisions income statement for each of the six months ended 31 December, some things come to light about these costs.

Sales

In the year ended 30 June 2021, the division sold 105,000 dishwashers.

Cost of materials

The cost of materials to manufacture the dishwashers depends on several factors. These include:

Price of raw materials and parts

Quantity of the materials and parts used

Waste in the form of off-cuts or defective parts in the manufacturing process

Not all dishwashers are manufactured and sold in the same accounting period, meaning that finished goods inventory sits in the warehouse until it is sold

However, in general, material costs increase in linear proportion to the number of dishwashers sold and is therefore a variable cost.

Staffing

The Divisions factories are highly automated. Most factory workers are on permanent contracts and receive a regular fortnightly salary. They occasionally work overtime as needed.

For additional labour, temporary workers are hired on a casual hourly basis.

This means labour cost consists of a fixed monthly component, plus a variable component which is closely correlated to sales volume.

Manufacturing overhead

Manufacturing overheads consist mainly of depreciation, repairs, preventative maintenance, rent, insurance, and other expenses related to manufacturing activities.

Sales and Marketing

Sales and marketing personnel help generate and support sales. The associated costs are part fixed and part variable.

Shipping

Shipping-related costs and the cost of after-sale service and warranties tend to increase in linear proportion to sales volume.

Finally, other operating costs do not depend on sales volume.

Capacity

Allowing for preventative maintenance, re-tooling, and other practical considerations, the divisions practical production capacity is estimated at 200,000 dishwashers per year

BUSM2567 Business Decision Making

AssessmentSSESSMENT 1 Mid-sem assessment

Appendices

Appendix 1: Income statement for the year ended 31 June 2021

Appendix 2: Income statement by month for July-December 2021

Appendix 3: A chart illustrating the divisions monthly operating profit as a function of sales volume for the six months ended 31 December 2021

Appendix 4: Cost Volume Price (CVP) analysis equation

Appendix 5: Data points for the chart illustrating the divisions monthly operating profit.